 Bangalore city is very famous for ‘agarbati’.

You will find ‘agarbati’ made in Bangalore in

every corner of India. There are two such
brands famous for making sandal agarbati .
One is ‘Cycle Brand’ and other is ‘N Ranga
Rao co’ . Now suppose following a new
machine being installed by ‘ cycle brand’ – it
reduced the price of the agarbatis. How this
move will affect ‘N Ranga rao co’ ?
 Cross Elasticity:
 The responsiveness of demand
of one good to changes in the price of a related
good – either a substitute or a complement
% Δ Qd of good x
_____________
Xed =
% Δ Price of good y

 QDx/QDx ÷ Py/Py
 Goods which are complements:
 CrossElasticity will have negative sign (inverse
relationship between the two)
 Goods which are substitutes:
 CrossElasticity will have a positive sign (positive
relationship between the two)
 Suppose your salary has increased from Rs.
20,000 to Rs. 40,000 per month. Previously
you owned a bike. Since your salary has
doubled, you are thinking of selling the bike
and buying a small car.
 So demand for bike falls and demand for car
increases.
 Income Elasticity of Demand:

 The responsiveness of demand to changes

in income.

measurement
 QDx/QDx ÷ I/I
 Normal Good – demand rises as income rises and
vice versa
 Inferior Good – demand falls as income rises and
vice versa

Income Elasticity of Demand:

 A positive sign denotes a normal good
-Necessary goods < 1 but > 0
-Luxury goods > 1
 A negative sign denotes an inferior good i.e.
elasticity < 0
 Availability of close substitute ( sunflower
oil and mustard oil)
 Share of income we spend on an item
(food item will always be more price
elastic than toothbrush or pens)
 Time dimension (increase in price of fuel –
people change to fuel efficient cars- Short
run dd is inelastic than in Long Run)
 Nature of the commodity (i-pod will
always be elastic than milk)
 Normal / inferior
 Luxury / necessary
 Development stage of the country ( T.V. is a
luxury in India but necessary in U.S.A)
 Consumption pattern takes some time to
change
 Addiction (smoker)
Thank you for your attention